Professional Documents
Culture Documents
ALTERNATIVES
Investment Alternatives
Those with initial (or front-end) capital investment that
produces positive cash flows from increased revenue, savings
through reduced costs, or both.
Cost Alternatives
Those with all negative cash flows, except for a possible
positive cash flow from disposal of assets at the end of the
projects useful life.
-$100,000
-$125,000
$34,000
$41,000
Capital investment
-$80,000
-$60,000
Annual expenses
-$25,000
-$30,000
F2
F3
$110,000
$125,000
$138,000
Useful life
10 years
10 years
10 years
Total annual
expenses
$53,800
$51,625
$45,033
Investment
Repeatability assumption
The study period is either indefinitely long or equal to a
common multiple of the lives of the MEAs.
The economic consequences expected during the MEAs
life spans will also happen in succeeding life spans
(replacements).
Co-terminated assumption: uses a finite and identical study
period for all MEAs. Cash flow adjustments may be made to
satisfy alternative performance needs over the study period.
-$150,000
-$85,000
-$75,000
-$120,000
Annual revenues
$28,000
$16,000
$15,000
$22,000
Annual expenses
-$1,000
-$550
-$500
-$700
$20,000
$10,000
$6,000
$11,000
10
10
10
10
Capital investment
Life (years)
Incremental analysis
Initial cost
Net annual income
IRR on total cash flow
Alt. A
Alt. B
Alt. B-Alt. A
-$25,000
-$35,000
-$10,000
$7,500
$10,200
$3,200
15%
14%
11%
Capital
investment
$12,000
$12,500
$14,400
$16,250
$20,000
Net annual
income
$2,500
$2,520
$3,050
$3,620
$4,400
12.99%
12.04%
13.48%
14.99%
14.61%
IRR
Cost alternatives
Contracting or leasing for remaining years may be
appropriate
Repeat part of the useful life and use an estimated market
value to truncate
Investment alternatives
Cash flows reinvested at the MARR at the end of the
study period
Replace with another asset, with possibly different cash
flows, after the study period
$3,500
$5,000
$1,255
$1,480